No one should debate that the U.S. has too much debt, and it may be that Treasury yields need to rise just to normalize with the pickup in the economy. However, investors should not forget that the U.S. is still home to the largest and most liquid capital market structure in the world. There may not be much value left in the Treasury market, but in my opinion we are still a long way from becoming the next Greece. While we don’t treat this announcement as good news, we don’t believe it will be much of a factor for the cyclical time frame we invest, and therefore it is not a game changer to our current forecast that the cyclical bull market is still intact.
One of the interesting aspects to the day was that risk assets lost ground and talking heads blamed the ratings warning as the key catalyst, but market action seemed to imply that other factors may have been at work. We couldn’t help but notice that the U.S. dollar actually went up during the day, and though Treasuries started the day lower, they rallied as money came out of high beta sectors and fled to safety in bonds. If markets were worried that we will go the way of the PIIGS (Portugal, Ireland, Italy, Greece, Spain), then the bond market vigilantes would have likely given us a much bigger wakeup call in the form of higher, not lower, bond yields.
